Thank You

Error.

Another week, another record high. The stock market continues to party like it was 1999, and last week equities soared 2% on mostly good economic news and a strong dose of reviving animal spirits.

Not even chatter that the Federal Reserve might tap the brakes on its easy money policy this year was enough to spoil the festivities. Friday's release of stronger-than-expected U.S. leading economic indicators and consumer-sentiment data helped bring the week to a strong finish.

On the week, the Dow closed at 15,354.40, up 236 points, or 1.6%, while the S&P 500 rose 34, or 2%, to end at 1667.47. Both indexes closed at all-time highs—again. The technology-heavy Nasdaq Composite index gained 62 points, or 1.8%, to 3498.97.

The parade of new highs is a nice rush for investors, but when things start to look euphoric, it should awaken a bit of caution, at least for the short term, and the upcoming traditionally weak summer season. "At this point, the market looks like a giant momentum machine," says Steve Sosnick, a senior trader at Timber Hill. Selloffs have been minor, even in reaction to negative Fed news.

The market fell on Thursday after John Williams, head of the Federal Reserve's San Francisco branch, said the central bank could end its bond-buying program later this year if the jobs market continues to improve. The Fed's monthly purchases of some $85 billion in bonds has kept interest rates low and stock prices high.

Investors should note, adds Sosnick, that some of the best-performing stocks have been those with the highest concentrations of short interest, like
Tesla MotorsTSLA -0.9445348166028231%Tesla Motors Inc.U.S.: NasdaqUSD188.77
-1.8-0.9445348166028231%
/Date(1427835600130-0500)/
Volume (Delayed 15m)
:
4886669AFTER HOURSUSD188.3
-0.469999999999999-0.2489802405043174%
Volume (Delayed 15m)
:
135697
P/E Ratio
N/AMarket Cap
23966655924.1675
Dividend Yield
N/ARev. per Employee
314768More quote details and news »TSLAinYour ValueYour ChangeShort position
(ticker: TSLA), the maker of upscale electric cars. The stock is up 140% since March, to $91.50 on Friday.

Such moves, he adds, suggests the fear of being left out is now bigger than the fear of a market drop, and that investors are chasing performance. The bears are throwing in the towel, he says.

Still, a little bit of caution doesn't hurt. "It's increasingly hard to come up with the next worry that could derail the market," Sosnick says. "Ironically, that's my worry."

WITH THE BROAD MARKET hitting new high after new high, many stocks are being swept up in the general excitement. In some cases, valuations seem stretched beyond what the fundamentals can bear.

For example, shares of
Orbitz
(OWW) have taken flight. At Friday's close of $7.44, they've soared 250% since November, most of that in 2013, giving the online travel booker a market cap of nearly $800 million. The market is up 25% in the same time period.

The Orbitz bull case is brief. Global gross travel bookings are projected to post double-digit annual percentage growth in the next few years. At Orbitz, where 70% of gross bookings comes from low-margin air travel, bulls expect that growth in hotel bookings—which have margins of 15%-plus, five times better than air—will help turn the Chicago-based firm profitable this year.

In the first quarter, Orbitz's hotel revenue, about 30% of its total, jumped 27% and helped quarterly total sales rise 7%. Orbitz, which has lost money in every year since 2007, posted a first-quarter profit of $146 million, or $1.34 a share, compared with a loss of $6.5 million, or six cents per share, in the year-earlier quarter. The company raised 2013 revenue-growth guidance to 4%-7% from 2.5%-5%.

The good news ends there, however. A more sober look at Orbitz suggests the bear case is more convincing at these levels. Travel is an intensely competitive business with low customer loyalty. It's likely to become even more cutthroat, as a recent Barron's article pointed out ("This Means War," April 15).

Orbitz's first-quarter profit came thanks to a large, one-time tax benefit of $158.5 million. Without that, it would have posted a loss of $12.4 million, about twice the year-ago quarter's shortfall. Hotel revenue might be growing fast, but it's still only a third of revenue, as is air travel. Also ignored by bulls is that Orbitz's total operating expenses in the first quarter rose 11%, to $205.7 million, faster than revenue growth.

Expenses like marketing, up 14%, will get even more difficult for little Orbitz. Priceline.com and Expedia are planning big ad campaigns. Investment bank Lazard Capital Markets estimates that together they will spend about $3 billion in ads this year, versus just $260 million by Orbitz. Perhaps that's why the 2013 sales-outlook increase wasn't accompanied by a hike to Orbitz guidance of 5%-10% growth in earnings before interest, taxes, depreciation, and amortization.

The first quarter can't paper over poor longer-term business trends at Orbitz. In the first quarter, gross bookings fell 1%, less bad than previous periods, but the third-consecutive quarterly drop. Transactions fell 4%, the fourth drop in a row, and online-travel-agency U.S. unique visitors have also fallen four quarters in a row.

Despite a weaker competitive position, Orbitz garners a much higher market valuation than peers. The stock trades at a price-to-earnings ratio of 22 times consensus analyst estimates of 36 cents per share in 2014, versus 15 and 17 times, respectively, at Expedia and Priceline.com, even though the latter two should grow their sales and Ebitda at least two to three times faster than Orbitz. (We used the 2014 P/E because Orbitz's 2013 P/E of eight is distorted by the tax windfall.)

An Orbitz spokesman said its ad spend as a percentage of revenue is comparable to peers. The company declined to provide guidance on hotel bookings in the rest of 2013. Ebitda guidance wasn't increased, he added, because Orbitz is stepping up its marketing investment.

The bulls say things can only go up from here, but the shares have raced ahead of what seems reasonably possible this year. A small miss on earnings or revenue will likely lead to a big stock drop at Orbitz, ending this flight of fancy.

LIKE ORBITZ, SHARES OF the U.S.' biggest theme-park operator,
Six Flags EntertainmentSIX 0.206996481059822%Six Flags Entertainment Corp.U.S.: NYSEUSD48.41
0.10.206996481059822%
/Date(1427835927552-0500)/
Volume (Delayed 15m)
:
575955AFTER HOURSUSD48.41
%
Volume (Delayed 15m)
:
9956
P/E Ratio
60.5125Market Cap
4579933128.0101
Dividend Yield
4.296632927081181% Rev. per Employee
618838More quote details and news »SIXinYour ValueYour ChangeShort position
(SIX), have been on wild ride higher. A chart of its stock rise might approximate a side view of its fearsome Raging Bull roller coaster at Six Flags in Illinois, one of its 18 parks. Six Flags finished on Friday at $78.09, up more than 200% since October 2011, and triple the market's rise during the same period.

The industry picture has improved a bit. The era of monster roller-coaster building and heavy ad spending seems over, and some rival parks have closed, so competition has eased.

Additionally, following Six Flag's emergence from bankruptcy in May 2010, the company appointed James Reid-Anderson as chairman and CEO. He's well liked by investors for taking medical-diagnostics company Dade Behring Holdings out of bankruptcy in 2002 and selling it in 2007 to
Siemens
(SI) at a high price, $7 billion, or over four times sales.

Built into the stock price is the hope that Reid-Anderson can work the same magic at the Grand Prairie, Texas-based company, which has a market value of $3.8 billion. The market also loves its $900 million in net operating loss (NOL) carry-forwards, which will shield income and dividends from taxes for a while, as they did in the first quarter.

Beyond the NOLs, the bull story in a nutshell is that its strong brand and relatively steady cash-flow growth, combined with better capital allocation and higher ticket prices will improve results significantly. Theme parks are stable in a normal economy and, with an average admission price of $55, good entertainment value.

The problem is that the current valuation assumes all that and more. Six Flags trades at a rich 31 times consensus estimates of $2.56 per share this year and 27 times 2014 earnings-per-share estimate of $2.89, for just 10% growth in that period. This year, Ebitda is expected to grow 16%, to $409 million, from $353 million in 2012. Even if those numbers materialize, it doesn't justify such a lofty valuation.

The Ebitda, shorts point out, doesn't include stock-based compensation, which was $63 million last year, for example. Meanwhile, as an offset, the company is furiously buying back stock, 11% of its shares outstanding in the first quarter of 2013, which flatters EPS and growth artificially. Moreover, Six Flags is buying back stock at these high valuations, not a particularly efficient use of capital.

Six Flags' steady growth is nice but likely too slow to support its high multiple. Reid-Anderson is improving things, but Six Flags and the industry have a long history of modest average growth, punctuated by a year or two of fat or lean times, depending on economic conditions and weather.

For example, Six Flags' average revenue growth since 2005 has been about 2%, and Ebitda 10%. According to the Themed Entertainment Association, attendance growth at the top 20 U.S. parks from 2007 to 2011 averaged 1%, excluding the relatively new Harry Potter park in Florida. These are not sparkling figures.

And investors should ask what long-term competitive edge NOLs afford Six Flags. The company is leveraged, with debt of $1.4 billion, and a debt-to-total-capital ratio of about 75%. Investors often forget that weather plays an important role in theme-park attendance and results. Summer is when Six Flags makes hay, and one rainy season can wash out a whole year at one park.

In response to a request for comment, Six Flags said its NOLs will last until 2017 and that stock compensation will run about 50%-60% lower this year. It said its capital allocation is "very shareholder friendly" and Six Flags will continue to use the balance of excess cash flow for share repurchases.

In the past, Six Flags gave away too much growth through deep discounting, and its new strategy includes disciplined pricing, further penetration of season pass sales, and more local ads instead of national.

Like Orbitz, Six Flags will disappoint eventually, and even a minor letdown could end the stock's rally, perhaps reminding investors of the company's Drop of Doom ride at its Valencia, Calif., parks.